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Fix for Minn. budget woe? End sales tax exemptions

With Minnesota lawmakers staring at a $6.2
billion deficit this session, state Rep. Pat Garofalo knows as well
as anyone that balancing the state budget is "going to be tough
and it could be ugly."

So why is the Republican from Farmington introducing a bill that
would make things just a tiny bit worse, by exempting animal
shelter pets from the statewide sales tax?

"At the end of the day, I like puppies and kitties," Garofalo
said.

His proposal would cost the state only a little money - easily
less than a million dollars a year, he estimates. But it would add
yet another carve-out to the state's tapestry of sales tax
exemptions, 83 special deals on everything from staples like food
and clothes to more oddball exceptions like horses, used motor oil
and the machines used to make fake snow at ski hills.

In fact, Minnesota lawmakers could wipe out that $6.2 billion
deficit at once if they repealed every single sales tax exemption.
Figures from the Department of Revenue show plugging those 83
exemptions would dump - you guessed it - just about $6.2 billion
into the state treasury over the next two years. Another $5.3
billion would be up for grabs if lawmakers mustered the political
will to apply the sales tax to several dozen services that are also
exempt, from hiring lawyers and accountants to paying for funerals
and safe deposit box rental.

But it's easier said than done.

Plenty of state lawmakers and even former governors have tried
to pare back the exemptions but run into a political brick wall.
Similar efforts to do so in other U.S. states - most have dozens or
more exemptions on the books - have failed, too.

"Why is it that, if you're a tool maker and I own a law firm,
your product is taxed and mine is not?" said state Rep. Melissa
Hortman, D-Brooklyn Park. "We both drive on the same roads. Our
kids go to the same schools. But your business has to take more out
of its bottom line than mine does to keep up with the sales tax."

In 2008, Hortman introduced a bill to eliminate all state sales
tax exemptions and correspondingly lower the overall sales tax
rate. "I couldn't even get one co-sponsor," she said. In 2011,
former Gov. Jesse Ventura proposed eliminating some exemptions and
bringing down the total rate. It went nowhere, and in 2009 a tax
reform commission convened by Gov. Tim Pawlenty offered much the
same idea. Nothing came of it.

Last year, independent candidate for governor Tom Horner tried
again with a similar proposal in his campaign platform. He finished
a distant third. State Sen. Tom Bakk, a failed Democratic candidate
for governor last year, got no traction for his proposal to add the
sales tax to clothing. That alone would raise about $600 million in
2011-12, but the 43-year-old exemption has proved tenacious in this
home to the Mall of America.

Even more costly is the exemption for food, which if taxed would
raise nearly $800 million in 2011-12. Lifting the exemption on
drugs and medicine would generate $565 million over those two
years; adding the sales tax to residential heating fuels, used
motor oil, and a small mix of exempt tools and equipment would
generate nearly $300 million.

"They don't get repealed often," said Carl Davis, senior
analyst at the Institute on Taxation and Economic Policy, a
Washington-based nonprofit that advocates progressive taxation.
"In most cases, exemptions are heavily beneficial to a very
interested and vocal minority that is willing to heavily invest in
hanging on to them."

In Rhode Island, new Gov. Lincoln Chaffee has proposed a 1
percent sales tax on items currently exempt from that state's 7
percent sales tax to help close the budget gap there. In its annual
State and Local Tax legislative outlook, the national accounting
firm Grant Thornton LLP predicted recently that more states would
look to broader sales tax bases as a way to get out of budget jams.

There's been no such proposal so far in Minnesota, where
Democratic Gov. Mark Dayton wants to raise the income tax rate on
high earners as his major weapon for fixing the budget. The
Legislature's Republican majority, meanwhile, wants to do it with
spending cuts.

But later this week, the Senate Finance and Tax committees will
comb through the Department of Revenue's tax expenditure report,
which details the breaks. Sen. Claire Robling, chairwoman of the
Finance Committee, said an initial read shocked her - and helped
her see an alternative approach to fixing the budget problem.

"We are giving up a ton of revenue here," said Robling,
R-Jordan. "We're looking for our best bang for the buck, in a time
where we really need job creation. Maybe we should be looking at
some of these exemptions and asking if they are really bolstering
economic growth. If they're not, maybe something else might be more
effective."